This paper compares two major economic theories of unemployment and inflation: Karl Marx's concept of the "Reserve Army of the Unemployed" from Capital and A.W. Phillips's 1958 Phillips Curve theory. Both theories propose mechanisms by which labor surplus controls wages and inflation, yet operate in different historical and political contexts. The paper identifies nine key similarities—including their grounding in British economic conditions, reliance on ruling-class control, and shared focus on wealth accumulation—and four major differences regarding scope, administration, complexity, and social versus economic focus. The analysis concludes that while both theories were empirically valid when proposed, contemporary economies have rendered them less reliable frameworks for policy makers.
Karl Marx's concept of the Reserve Army of the Unemployed, outlined in Capital, describes the working population as a variable ingredient in the composition of capital. Marx theorized that increases in capital required increases in labor, but in consistently diminishing proportion. Critically, he observed that capitalists maintained a need for a pool of unemployed labor to keep wages low.1
The Phillips Curve refers to British economist A.W. Phillips's 1958 theory proposing a relationship between unemployment and inflation. One version of the theory suggested that "policymakers could permanently lower the unemployment rate by generating higher inflation." This appeared valid at the time but was challenged nine years later as the economy evolved. The theory is under further scrutiny today and is considered by some to be unreliable for contemporary economics.
The second important unemployment concept is the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. This is the unemployment rate consistent with maintaining stable inflation. According to standard macroeconomic theory, inflation will tend to rise if the unemployment rate falls below the natural rate. Conversely, when the unemployment rate rises above the natural rate, inflation tends to fall. Thus, the natural rate and NAIRU are often viewed as two names for the same thing, providing an important benchmark for gauging the business cycle, inflation outlook, and appropriate monetary policy stance.
Capitalists in Marx's world kept wages low by supporting policies that caused unemployment and the growth of a large labor pool. Examples include the use of child labor and women workers in mills and mines. This oversupply of workers forced them to compete against each other for wages, often maintaining subsistence-level earnings. Mine owners had such a free hand that safety was only a concern when production itself faced interruption.
Governments subscribing to Phillips Curve theory also controlled unemployment but through different mechanisms: encouraging immigration to swell the labor pool, implementing wage and price controls, and passing laws favorable to the ruling class. In these eras, women lacked voting rights and were considered property.
During Marx's lifetime (1818–1883), labor migration from countryside to urban centers became clearly recognizable as pools of labor swelled city centers during the Industrial Revolution. The ruling class, who owned machinery and factories, could manipulate economic forces controlling national wealth. Decisions such as which products to export were of great interest and benefit to governments, many of whose members belonged to the ruling class.
Similarly, Phillips Curve theory involved government intervention and monetary policy manipulation, which could include changing interest rates (to attract or repel investment), taxation on people and products, and tariffs on imported goods—all mechanisms to manipulate national wealth.
The ranks of the Reserve Army swelled as the Industrial Revolution progressed. As new machines displaced workers, reducing production costs and increasing productivity, the ruling class grew richer. Capitalists could choose to maintain increased profits from decreased labor costs, or to purchase more machines operated by the same workforce at identical overhead costs but generating larger profits. By continually increasing profits, they could purchase even more machinery and expand their workforce.
In this way, capitalist business policies exerted great control over the economy, similar to government monetary policies under Phillips Curve theory.
If the army of labor became too small, the price of labor increased and consequently production costs rose. Increased commodity costs gave rise to inflation. This mechanism operates identically in both theories and remains true today.
Both theories were proven correct at the time of their announcement. Marx's theory of Surplus-Value was greeted with scholarly respect, albeit subdued, since it was unpopular with industrial owners. The Phillips Curve was based on statistics gathered between 1861 and 1957. A.W. Phillips published his theory in 1958 and statistics initially proved him correct, although nine years later, in 1967, economists Edmund Phelps and Milton Friedman challenged his theory. They argued that any trade-off would be short-lived because people would come to expect higher inflation and that monetary policy alone could not maintain unemployment below its natural level (equilibrium). More recently, the Phillips Curve has been questioned and is considered unreliable by many economists.
Marx's theory of the capitalist need for a Reserve Army of the Unemployed is no longer valid in general terms. In most industrialized nations, there exists an unfortunately large surplus of unemployed workers. What has changed is the skills required of those workers. Every nation now faces a shortage of workers with ability to create or use the latest technology.
Similarly, Phillips Curve theory is no longer valid since no one seems to know what the natural level of unemployment really is, and neither inflation nor unemployment can be reliably predicted to affect each other. There is strong opinion that it is "time to ditch the NAIRU."
Both theories were developed based on the economy and culture of Great Britain. The class system in Great Britain when Marx and Frederick Engels wrote the Communist Manifesto was abhorrent to both and vastly different from today. The British class system has since changed, becoming less aristocratic and more mercenary. Similarly, economic reality has shifted; power has been transferred from the landed gentry and aristocracy, with even the monarchy now subject to taxation.
You’re 48% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.